A growing number of technology startups are being threatened with lawsuits over broad patents they allegedly, and inadvertently, infringed. The founders of three small startups came to Washington this week and spent Wednesday lobbying members of Congress to change the patent system.
"This is the single worst thing to happen to me since I started the company," says one of the CEOs, the founder of a five-person e-commerce startup that was targeted by a firm he calls a patent troll. He is so concerned about retaliation from that firm that he asked that his name not be used for this story.
He says that being targeted by a patent lawsuit is worse than times he's lost clients or run out of money. It's even worse than having to do without a salary for the last year. He admits he's fortunate that his wife has a steady job that allows them to support their children. But the possibility that a patent lawsuit he regards as frivolous could destroy his company keeps him up at night.
The firm has raised about a million dollars from investors. The CEO says that after paying his employees' salaries, his top expense is legal bills. And the vast majority of those legal costs relate to a single patent lawsuit.
The entrepreneur says he didn't copy the plaintiff's technology; indeed he'd never heard of the firm until it started making legal threats. He describes the patents he is accused of infringing as extraordinarily broad. The complaint claims the firm infringed one of the plaintiff's patents by using a wireless device, a database, and a Web site to synchronize data and perform common e-commerce functions—things that hundreds of web startups do. "Anyone is at risk for that," he says. "And it never gets more specific."
The firm that is suing him once marketed products of its own, but those days appear to be long in the past. The "news" section of the company's Web site lists several years' worth of news releases; all of the articles focus on the firm's patent licensing and litigation efforts. There are no product announcements or other stories indicating that the firm is still selling the technology claimed by its patents.
Patent law doesn't require a patent holder to be specific about a defendant's alleged infringement until well after the litigation process has started. "By the time they get into litigation it's too late," the founder says. The defendant will have already racked up enough legal expenses to ruin a small software company.
"Last week I spent 10 or 12 hours working on this," the anonymous CEO says. "And in a startup that's a lot." He spends time "producing documents, reviewing stuff from my lawyers, answering questions from my lawyers. It's affected our hiring, it's affected my stress levels and my health. It sucks up time I could spend growing the business."
Even worse, "I know every time I answer a question from my lawyer it's costing me hundreds of dollars. The troll even said that: 'You should just settle because it's going to be way more expensive to defend yourself than settle.'"
Indeed, even winning in court may not be enough to end the financial bleeding. Another founder who participated in this week's lobbying visit, which was organized by an industry group called the App Developers Alliance, was Peter Braxton. He's the founder of a company called Jump Rope and his story was recently told by the New York Times. He won a ruling in February that the patent lawsuit against him was frivolous. But that wasn't the end of the case.
The plaintiff, a Chicago company called Smart Options, vowed to appeal, a process that could cost Jump Rope tens of thousands of dollars in additional legal costs. And Braxton says that Smart Options told him "Look we may not win this appeal. But what we are going to do is sue you again on a different patent."
A spokesman for Smart Options denied that the company had ever made that comment to Braxton. However, he said, "we do have other patents that we believe Jump Rope and its developer likely infringe." The spokesman insisted that Smart Options is not a "serial patent suer." Rather, it was in the business of "helping others who are in business to license our patents."
The prospect of never-ending legal costs gives startups a strong incentive to capitulate, regardless of the merits of a plaintiff's case. Settling a patent lawsuit might only cost thousands of dollars, while winning a patent lawsuit, even against a meritless claim, can cost millions.
"My existing investors look at this as an unfortunate normalcy in the startup world," the anonymous CEO says. One investor told him that a third of the companies he's investing in are dealing with similar legal threats. "The investment community feels this is just a cost of doing business," he says, but "it certainly makes things hairier for businesses trying to raise capital."
"A small business's only defense is outgrowing the litigants," he says. Once a startup gets large enough to have its own team of lawyers on staff, the costs of patent litigation become manageable. "It's like a sprint to get big enough to survive a patent troll." And the anonymous founder is worried his own firm might not make it.